Ludwig von Mises claimed that any amount of money supply is enough. Why is he wrong?

Question as written is extremely vague.

Define "enough". What are you trying to accomplish? "Enough" to do what? Do you care if you get incredibly ****ty outcomes?

Just to follow up a bit--we really should define things.

One thing I think is safe to assume is Mises meant a reasonable amount of money, compared with the atom. That is, if the smallest denomination (in a non-electric/bitcoin world) was one cent, than obviously with 300 million people in the US, $100 in currency wouldn't be enough (unless you were to allow a nearly zero-reserve banking system so you could get whatever money supply you actually wanted). Well, I'm also assuming that whatever is officially called money is used--instead of barter or something else springing up beside the 'official' money. Or at least if something else springs up, we include that in our definition of money supply.

So then, as long as the total money supply/money base was large compared to the atom of money, any money supply would be 'enough' in one sense. We'd have transactions, we'd use the money, etc. But, my question is "is that all we care about?" We might have just a functioning economy when we could have a good economy? Would we have a stagnant economy when we could have a vibrant economy? To me, those are important questions. The reason I have to ask though is that I've seen many people who are just so "no government"--even though the Fed isn't and needn't be 'government' to do what it does--that they won't even consider those questions.

I agree with coffee, you need to have enough amount of currency to make any reasonable purchase possible. Which in the US, I think you could say 5 or 10 cents is the smallest denomination needed.

As for how much of the money supply, you need to have whatever it takes to make the smallest possible denomination worth about that.

But one interesting thing is, if it was too big and not divisible, then either a superior currency would come about that would have that feature plus the rest of the existing currency, or they would exist side-by-side (gold for big purchases, silver for small).

There is no fundamental difference between 1 dollar, 100 dollars, 1 million, etc... You just have smaller denominations.

What Mises meant is that a money supply that doesn't grow doesn't prevent economic growth, as keynesians argue.

Also, in the context of precius & semi-precius metals, money is pretty much infinitely divisible. There's no need for all coins to be 100% pure gold or silver or even copper. There's cheaper metals you can use for alloys or to make the outer part of the coin, with the precious metal in the center. Under extreme circumstances you could even have plastic tokens that have a very small amount of the precious metal in the center.

Most mainstream economists today believe they can improve economic conditions if a central agency monopolizes the issuance of currency, bans any other form of money or barter, and controls the supply of money by printing as much as they want and loaning it out to expand the supply, or calling loans back to contract it. These policies lead to malinvestments of capital and human resources that generate booms and busts and stagnate economic growth. They also redistribute wealth with all the deleterious economic effects that carries.

Yeah obviously. As coffeemonster specified, we were talking about "if the smallest denomination (in a non-electric/bitcoin world) was one cent". That is, if you couldn't have smaller denominations (a situation that I believe has ocurred many times in human history).

Of course they are considering those questions. Simply their answer is that a money supply that is impossible to greatly inflate serves these goals best.

I am not sure if they are right or not. "Sticky prices" (or more specifically, wages) seems to me like a legit argument for inflation. However, moral hazard and removal of incentives to make sure that your investments are sane also seems like a legit argument against it.

catch 22 - this is only a problem because during a depression wages need to go down. depressions occur because of bank credit expansion that is made possible by monetary inflation. eliminate the monetary inflation, eliminate the depressions and then 'sticky wages' aren't a problem.

I agree--I figured they were talking about that, but the OP was pretty vague, and I'm sure Mises has said/written a ton of stuff, so trying to hone in on the exact statement by Mises was pretty difficult given the OP.


To anyone: is there a specific reference that you'd like to discuss re: the claim in the OP? I'd actually like to (when I have a bit of time) get into a bit more of a discussion about the particular claim than just assertions about what the mainstream believes and that it is wrong, or assertions about what the Austrians believe and that it is wrong.

BTW, I'm pretty certain (and I'm not trying to be facetious--I mean that) that the Keynesian claim isn't quite what s2bp says. The way *I* would say it with what I know is that the Keynesians would say that manipulating the money supply reduces the magnitude of the booms and busts. That's quite a bit different than saying that you wouldn't get economic growth with a fixed money supply. Especially with the concept of monetary neutrality. From Mankiw's chapter titled "Money Growth and Inflation" in the Intro to Econ series, "Over the course of a decade, monetary changes have significant effects on nominal variables (such as the price level) but only negligible effects on real variables". Short run (1-2 years) Keynesians do believe that monetary policy effects real variables though.

So, if you asked (most?) Keynesians if monetary policy effects economic growth in the long run--that is, if you have fiat money with a Federal reserve manipulating the money supply versus a fixed money supply--they'd say "not really". That's not what was claimed in s2bp's first sentence. The third paragraph of his is a bit more interesting...

This is a huge claim that needs a little more backing than 'it just will'.

Claim in particular (as I read it) is 'fiat money means we'll never have a recession/depression'.

Especially since (as I was going to say with respect to s2bp's third paragraph) the monetary policy tries to go in the opposite direction of what seems to be claimed. I'm assuming by 'bank credit expansion' caused by 'monetary inflation' you mean that interest rates were artificially low. But the monetary policy during a boom is actually the opposite--the Fed would want to *raise* interest rates with a monetary deflation policy in the boom times so the economy doesn't 'overheat' and experience a period of large price inflation. It's only after a recession is started that the fed would pursue monetary inflationary policies that would cause interest rates to decrease and banks to expand their credit.

At least I hope I'm reading that right and not mixing AE terms up. Please correct and forgive me if I am.

Well monetary policy isn't the only thing that can stop an economy from growing. For example even if North Korea adopted the Gold Standard but retained every other aspect of their totalitarian society, they're not going to be the Botswana of the 21st century. But yeah, for the most part, assuming fiat was a typo.

Fair enough--I wanted to ask/question that statement quickly, and then provide other content. Most of that last post of mine was assuming what you clarified above--that there will be recessions/depressions with or without fiat money.

Then the question becomes interesting--do we have more and/or more severe recessions with fiat than without or vice versa.

Well that depends... are we talking about a simple reform of the monetary system, or are we adopted libertarian solutions whole cloth? In libertopia there would be no depressions. Theoretically they could happen, say if a hurricaine washed away whatever tiny nation island we were all crammed on to, but they wouldn't just happen like they do today.

Incidentally, the answer to why business cycles occur MUST be in the monetary system - what else touches all parts of the economy?

the idea that the money supply needs to increase is that nominal growth in assets under a fixed money supply implies the economy is levering up in nominal terms. at least thats what phonebooth would say despite the fact its an irrelevant point.

nothing is wrong with a fixed money supply. the basic counter argument is that increases in demand for money should be met with increases in supply, but if prices are fluid there is no need for this. even if prices aren't fluid an increase in the money supply won't remedy the problem, and the asymmetric nature of money increases is bound to cause additional problems.

I hope you're back at some point---guess that Trayvon thread got a few people---you really need to cite or give a better argument than what you did. Just saying "no recessions would occur in libertopia" is quite a grand claim.

Second, at least in general equilibrium models, everything touches all parts of the economy. I mean the most recent recession was in part precipitated by the housing market crash, which would generally lead to people feeling less wealthy and cutting back on their purchases. Hence, the housing market touches all markets.

I have a feeling that the opinion of mainstream economists will take a hit after they read Nassim Talebs next book. Trying to lessen the business cycles sure seems to decrese the robustness of our antifragile economy and set us up for large negative black swans which might be what we are seeing right now.

http://www.econtalk.org/archives/201...on_antifr.html

The penny is a fudge factor for the dollar. You could also divide the penny into hundreds and and call 100 bits = 1 penny. I actually remember the day where you could go into kmart and get a gumball for 1 penny.

Mises is not wrong, but most in the Mises support a gold standard, which imho is vastly inferior to a just a fixed money supply or even a fixed growth in money supply (1% to cover the costs of monitoring the system, printing of currency).

In the deflation thread, I came to conclusion savings/hoarding will eventually equal spending or gdp . When this occurs there will be no inflation (minus population growth and productivity). This will also maximize real gdp growth and wealth of the citizens using the currency.

The money saved ending the fed (other than monitoring banks, fraud, lies corruption) and not mining gold could be used to expand nasa to go to the moon and mars or building better roads (via prizes and low bids). Not allowing congress to print money via the mandrake mechanism, will expand the wealth of the country and especially the poor even more.

I think you missed the point. If there was no way to make a transaction for an amount less than 5 cent increments, it would be fine (based on today's values). Probably even 10 or 25 cents even.

Dividing it anymore is of course possible and not really harmful other than the practical nature of effort trying to divide it that much.

Deflation (appreciating value of the currency) is a serious issue and a sign of unhealthy economy. Either there is something wrong with private credit or the amount of goods and services is shrinking.

The idea that institutes, such as banks, are only backing their money with X (gold, silver) is absurd anyways.

From 1800 to 1900 there was deflation, and the economy was not unhealthy. Instead it turned a nation of pitchforks and wooden ships into a national of machines and steel. The sign of a unhealthy economy is inflation especially high inflation, as it usually means the government is involved in printing money, forcing savers to lose their life savings.

The gold standard worked. The gold standard took the government out of the robbing and inflation tax business and forced those living off government to work.

deflation happens after growth. if goods and services shrink, prices would rise.
Have you ever looked at prices and growth over 19th century? How about in technology?

also its only a serious problem in a credit economy that has little flexibility on restructuring. otherwise its perfectly healthy, and you've demonstrated nothing to contest this.

Notice that there were huge short-run fluctuations in inflation over that period. Here's a quote from a deeply researched book about economic history called "The Cash Nexus" by Niall Ferguson:

"Between 1849 and 1873 British prices rose by 51 per cent; then fell by 45 per cent between 1873 and 1896, only to rise by 39 per cent between 1896 and 1913. American prices followed a similar path."

That's nothing compared to the economic growth of the 21st century.

Again, quoting Niall Ferguson:

"From the point of view of achieving low and stable inflation and high and stable growth, the Bretton Woods system of which Keynes was a principal architect was superior - though other factors almost certainly contributed more to post-war success than the exchange rate regime."

this doesn't change the fact that prices on average fell through America's industrial revolution. Burningsquirrel's head should explode from this revelation.

difficult to compare but growth was substantial in the 19th century, there is no doubt about it. In any case much of growth in the 21st century has been in technology where prices are falling continuously, so this only adds to the counter point.

superior to what?

even still this sounds like a very off hand opinion rather than anything that is substantiated by strong fact.

Superior to the gold standard in terms of year to year inflation and economic growth, which were both more stable in the 20th century. Comparing the year 1800 to 1900 indicates that prices were little changed in the long run under the gold standard, but that conceals many violent swings in the value of the USD and GBP that occurred from one year or decade to the next. The volatility diminished considerably after adopting Bretton Woods. This data is summarized in Ferguson's "The Cash Nexus" in a chapter on international monetary regimes and is very extensively researched.